As Ofer Ganot reports in the current issue of The Pomerantz Monitor, the Delaware Chancery Court’s recent approval of a settlement in a case involving the Celera Corporation highlights the tension that occurs when companies entertain acquisition proposals. Bidders want to lock up a deal as tightly as possible, so that if they reach an agreement it will be more than just an opening bid in a free-for-all auction of the company. Targets, on the other hand, want to get the best deal they can, and therefore want as much freedom as possible to consider potentially better offers. Many volumes of case law have been devoted to trying to find a perfect balance between these competing interests.
For example, it is common for targets to open up their financial records to potential acquirers, so that they can do “due diligence” before preparing a bid for the company. However, to protect themselves, targets typically insist on a confidentiality agreement that includes ”standstill” provisions prohibiting potential bidders who inspect the records from making an offer for the target without an express invitation from the target’s board. These provisions also typically prevent the bidder from asking the board to waive these restrictions so that they can make an unsolicited bid.
A key feature of Delaware law is that merger agreements need to contain some kind of “fiduciary out” clause: even after a deal is signed, if a significantly better offer then comes in, the board needs to be allowed to consider it. To protect itself from such an eventuality, bidders routinely insist that the merger agreement contain deal protections, which make it more difficult – but in theory not impossible – for other companies to come in after the fact and bid against them. Among such protections are “no solicitation” clauses, which prevent the target, after a deal is signed, from soliciting a higher offer from somebody else.
The combination of standstill agreements and no solicitation deal protections in the same transaction can, however, create a huge problem: in conjunction, they provide no way for the target company to find out if anyone else is willing to make a better offer for the company. It can’t ask anyone if they want to make a better bid, because that would violate the “no solicitation” clause; and other potential bidders will probably have signed confidentiality agreements that don’t allow them to submit a bid unless the target asks them to do so. The result can be that there is no way for the board of the target company to find out if a better deal is out there – which they are obligated to do as part of their fiduciary duty.
In the Delaware Court of Chancery’s recent ruling in the Celera litigation, Vice Chancellor Parsons approved a settlement of a shareholder case arising from the acquisition of the company where both a “no solicitation” clause and standstill agreements were in effect, preventing the company from finding out if anyone else was ready or willing to submit a superior bid. A major part of the settlement was defendants’ agreement to waive the standstill agreements and allow other potential bidders to submit competing bids. Vice Chancellor Parson, commenting on the importance of that waiver as a benefit of the settlement, stated that, “taken together,” these two commonplace devices “are more problematic.” Since this mix blocked the board from inquiring further into “once-interested parties’” interest, Vice Chancellor Parson stated that “[p]laintiffs have at least a colorable argument that these constraints collectively operate to ensure an informational vacuum” and that “[c]ontracting into such a state conceivably could constitute a breach of fiduciary duty.”
In another recent decision involving the El Paso Corporation, which we discussed in a previous issue of the Monitor, the Delaware Chancery Court “reluctantly” refused to enjoin a merger even though the negotiation of that merger was heavily tainted by conflicts of interest. The court didn’t want to risk killing the only deal that was available to El Paso shareholders, because it would give them a substantial premium over the current market price. Chancellor Strine determined that shareholders were well-positioned to turn down this deal “if they did not like it” and that because no other bidders had materialized, the shareholders “should not be deprived of the chance to decide for themselves about this merger . . . ”
The confluence of “no solicitation” and standstill provisions, such as we saw in the Celera case, will present this very situation: no one else can make a bid, and in the absence of other potential bidders, the court will be reluctant to enjoin consummation of the only offer that is actually on the table.